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{{7-31-92 p.C-2234}}    [10,528] In the Matter of William R. Bottorf and Phillip M. Lewis, Jr., Sutton State Bank, Sutton, Nebraska, Docket No. FDIC-92-120b (5-7-92).

   Bank and institution-affiliated parties to cease and desist from such unsafe or unsound practices as engaging in violations of applicable laws and regulations; operating with management whose policies are detrimental to the Bank; and failing to provide adequate supervision over the Bank's affairs.

{{7-31-92 p.C-2235}}    [.1] Compensation—Respondents—Restitution
   [.2] Loans—Limits on Respondents
   [.3] Management—Management Plan—Minimum Requirements
   [.4] Board of Directors—Election—Outside Directors Added
   [.5] Institution-Affiliated Party—Transactions—Audit
   [.6] Institution-Affiliated Party—Transactions Restricted
   [.7] Restitution—Respondents—Source of Funds
   [.8] Dividends—Restricted
   [.9] Violations of Law—Eliminate/Correct
   [.10] Bank Operations—Internal Routine and Controls—Recordkeeping
   [.11] Shareholders—Disclosure—Cease and Desist Order
   [.12] Compliance Reports—Frequency

In the Matter of
WILLIAM R. BOTTORF, and
PHILLIP M.
LEWIS, JR.,individually and
as institution-affiliated
parties ofSUTTON STATE BANK
SUTTON, NEBRASKA
AND
SUTTON STATE BANK
SUTTON, NEBRASKA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DE
FDIC-92-120b

   William R. Bottorf and Phillip M. Lewis, Jr., (collectively "Individual Respondents") and Sutton State Bank, Sutton, Nebraska ("Bank"), having been advised of their right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violations of law and/or regulations alleged to have been committed by the Individual Respondents and the Bank and of their right to a hearing on such alleged charges under section 8(b) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(b), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated April 22, 1992, whereby solely for the purpose of this proceeding and without admitting or denying any unsafe or unsound banking practices or violations of law and/or regulations, the Individual Respondents and the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Individual Respondents and the Bank have engaged in unsafe or unsound banking practices and have violated laws and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

DEFINITIONS

   1. "Executive officer" means the same as the term in section 215.2(d) of Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O"), 12 C.F.R. § 215.2(d);
   2. "Extension of credit" means the same as the term in section 215.3 of Regulation O, 12 C.F.R. § 215.3;
   3. "Tier 1 or core capital" ("Tier 1 capital") means the same as the term in section 325.2(m) of the FDIC Rules and Regulations, 54 Fed. Reg. 10,154 10,161 (1991) (to be codified at 12 C.F.R. § 325.2(m));
   4. "Allowance for loan and lease losses" ("allowance") means the same as the term in section 325.2(a) of the FDIC Rules and Regulations, 54 Fed. Reg. 10,154 10,160 (1991) (to be codified at 12 C.F.R. § 325.2(a)) and in the Instructions for Preparation of Reports of Condition and Income ("Instructions");
   5. An individual who is "independent with respect to the Bank" means any individual who: (A) is not an officer or employee of the Bank, any subsidiary of the Bank, or any of its affiliated organizations; (B) does not own {{7-31-92 p.C-2236}} more than 5 percent of the outstanding shares of the Bank or any of its subsidiary or affiliated organizations; (C) is not related by blood, marriage or common financial interest to an officer or employee of the Bank, any subsidiary of the Bank, or any of its affiliated organizations or to any stockholder owning more than 5 percent of the outstanding shares of the Bank, any subsidiary of the Bank, or any of its affiliated organizations; or (D) is not indebted to the Bank, directly or indirectly (including the indebtedness of any entity in which the individual has a substantial financial interest), in an amount exceeding 5 percent of the Bank's Tier 1 capital and allowance;
   6. "Compensation." means the payment of money or provision of anything of value in consideration of employment including, but not limited to, wages or salaries, commissions, bonuses and fees of any type including director's fees; and
   7. "Person" means the same as the term in section 215.2(i) of Regulation O.

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Individual Respondents and the Bank, its institution-affiliated parties, as that term is defined in Section 3(u) of the Act, 12 U.S.C. § 1813(u), and its successors and assigns, cease and desist from the following unsafe and unsound banking practices and violations of law and/or regulations:
   A. engaging in violations of applicable laws and regulations;
   B. operating with management whose policies and practices are detrimental to the Bank; and
   C. failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices and violations of law and/or regulations.
   IT IS FURTHER ORDERED, that the Individual Respondents and the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1] 1. (a) Effective the date of this ORDER, except as permitted under paragraph 3 of this ORDER, the Bank shall not, directly or indirectly, in any form whatsoever:

       (i) pay compensation in William R. Bottorf which exceeds $39,175 per year;
       (ii) pay compensation to Phillip M. Lewis, Jr., which exceeds $31,675 per year; or
       (iii) increase the compensation of any other director or executive officer of the Bank.
   (b) No later than 60 days after the effective date of this ORDER, each Individual Respondent shall pay to the Bank the sum of $2,000 representing restitution or reimbursement to the Bank for the excess compensation previously received by such Individual Respondent. Such restitution or reimbursement shall be made in accordance with the requirements of paragraph 7 of this ORDER.

   [.2] 2. Effective the date of this ORDER:
   (a) Except when acting in their official capacity as members of the Bank's board of directors, the Individual Respondents shall not, directly or indirectly, and the Bank shall not allow the Individual Respondents to, directly or indirectly, participate in any manner whatsoever in any extension of credit to or for the benefit of any person who has a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss," "Doubtful," or "Substandard" and is uncollected.
   (b) The Bank's board of directors shall limit the authority of the Individual Respondents to extend credit directly or indirectly to any person, the related interest of such person or any individual related by blood, marriage, or common financial interest to any such person, to not more than $5,000 per advance and $10,000 in the aggregate without the prior written approval of the board of directors, which approval shall be recorded in the minutes of the board of directors.

   [.3] 3. (a) No more than 90 days from the effective date of this ORDER, the Bank shall complete or cause to be completed a study of the Bank's management needs and management compensation ("management study"). Such management study shall be conducted by an individual or entity that: (A) is acceptable to the Regional Director; (B) is independent with respect to the Bank; and (C) possesses recognized expertise in banking and bank management. Immediately upon retaining such individual or entity, the Bank shall instruct said individual or entity in writing to provide a separate copy of the management study to the Regional Director {{7-31-92 p.C-2237}}and the State Director at the same time that the completed management study is transmitted to the Bank. A copy of the written instruction shall be sent to the Regional Director and State Director at the same time it is sent to the individual or entity retained. The management study shall, at a minimum:

       (i) identify both the type and number of full time executive officer positions needed to manage efficiently and supervise properly the affairs of the Bank;
       (ii) develop comprehensive job descriptions for each executive officer position identified in paragraph 3(a)(i), including a statement of the duties and responsibilities of, and services performed by, persons employed in any executive officer position;
       (iii) indicate an appropriate level or range of compensation to retain a qualified individual to perform satisfactorily the duties, responsibilities, and services for each executive officer position identified in paragraph 3(a)(i); and
       (iv) based on the findings required by paragraphs 3(a)(i) through (iii) of this ORDER, make specific recommendations for restructuring the Bank's management, which may include, without limitation: a reduction in the number of executive officer positions through consolidation of the duties, responsibilities and services of the Bank's executive officers; converting certain executive officer positions to part time positions; and/or reducing executive officers' compensation to levels commensurate with the actual duties, responsibilities, and services of each executive officer.
   (b) No more than 30 days after receipt of comments from the Regional Director and the State Director regarding the management study, the board of directors shall adopt the recommendations contained in the management study, as modified by any comments, (hereinafter referred to as the "management program") and shall record such adoption in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall implement and follow the management program. The Bank shall not alter, amend, or modify the management program without the prior written consent of the Regional Director and the State Director.

[.4] 4. (a) No more than 90 days from the effective date of this ORDER, the board of directors shall prepare a list of potential candidates for the board of directors for consideration by the shareholders of the Bank. The list of potential candidates shall include individuals who are independent with respect to the Bank, in such manner that, if elected, would cause a majority of the board of directors to be independent with respect to the Bank. The actions taken in identifying potential candidates, including any communication with such individuals, shall be documented and made a part of the minutes of the board of directors. Copies of these board minutes shall be provided to the Regional Director no more than 120 days from the effective date of this ORDER.
   (b) At the next meeting of the shareholders of the Bank, and at each succeeding meeting of the shareholders at which Bank directors are to be elected, the members of the board of directors who are also shareholders shall nominate and support the election of candidates to the board of directors who are independent with respect to the Bank and who have agreed to stand for election to the board of directors in such number as is necessary to cause a majority of the board of directors to be and to remain independent with respect to the Bank.

[.5] 5. (a) No more than 90 days from the effective date of this ORDER, the Bank shall complete or cause to be completed, a study or audit of all transactions between the Bank and Sutton State Bank Insurance Agency ("SSBIA") from January 1, 1991, forward. Such study or audit shall be conducted by an individual or entity that: (A) is acceptable to the Regional Director; (B) is independent with respect to the Bank; and (C) possesses recognized expertise to perform such study or audit. Immediately upon retaining such individual or entity, the Bank shall instruct said individual or entity in writing to provide a separate copy of the study or audit to the Regional Director and the State Director as the same time that the completed study or audit is transmitted to the Bank. A copy of the written instruction shall be sent to the Regional Director and State Director at the same time it is sent to {{7-31-92 p.C-2238}}the individual or entity retained. The study or audit shall include:

       (i) analysis of the use of the Bank's premises and other property, equipment, office supplies and personnel (collectively referred to as "goods and services") in SSBIA's operation;
       (ii) a determination of the dollar amount which the Bank would charge a nonaffiliated company for use of the Bank's goods and services in an operation similar to SSBIA's operation. In no event shall the dollar amount which the Bank would charge for such goods and services be less than the actual cost incurred by the Bank in providing such goods and services to SSBIA; and
       (iii) a determination of the dollar amount, if any, by which the charges to a nonaffiliated company for such goods and services exceed the amount paid by SSBIA ("excess charges").
   (b) No more than 30 days after receipt of comments from the Regional Director and the State Director regarding the study or audit, the Bank's board of directors shall, after taking into consideration any comments, convene a meeting of the board of directors and shall adopt the determinations contained in the study or audit, and shall record such adoption and the dollar amount of any excess charges in the minutes of the board of directors. Promptly after such adoption, the Bank's board of directors shall make written demand upon the Individual Respondents for restitution or reimbursement of the excess charges, if any.
   (c) No more than 60 days after receipt of comments from the Regional Director and State Director, the Individual Respondents shall make restitution to or reimburse the Bank for any and all excess charges in accordance with the requirements of paragraph 7 of this ORDER. The liability of each Individual Respondent under this paragraph 5(c) shall be joint and several.

[.6] 6. (a) Effective the date of this ORDER, the Bank shall not engage in any transactions with or for the benefit of SS-BIA, or of any other affiliated or subsidiary entity, or any institution-affiliated party or any such party's related interests (collectively referred to as "affiliated interests") except (i) on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to the Bank as those prevailing at the time for comparable transactions with or involving any entity which is not an affiliate or a subsidiary, or is not an institution-affiliated party or related interest of such party (collectively referred to as "nonaffiliated interests"), or (ii) in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated interests.
   (b) The Bank shall support the basis for any transactions covered by paragraph 6(a) with documentation which shall be made a permanent part of the Bank's records and of the minutes of the board of directors' meeting at which such transactions were authorized. The documentation shall include, at a minimum:

       (i) the details of any transaction; including a description of any goods and services involved; and
       (ii) (A) a written comparison of the terms and circumstances, including the costs, comparing any such transaction with a similar transaction between the Bank and a nonaffiliated interest; or
         (B) in the absence of such comparison, a written analysis supporting any transaction as one that in good faith would be engaged in with a nonaffiliated interest.
   (c) With respect to any transaction covered by paragraph 6(a) of this ORDER, complete details of each proposed transaction, including the documentation required by paragraph 6(b) and evidence of the prior approval of the entire board of directors of the Bank, shall be submitted to the Regional Director and the State Director. Such information shall be received by the Regional Director and the State Director at least 30 days prior to consummation of the proposed transaction. A written record of the board of directors' consideration, prior to consummation of any such transaction, of any comment received from the Regional Director and/or the State Director during the 30-day period shall be included in the minutes of the board of directors.

   [.7] 7. (a) The restitution or reimbursement to be paid to the Bank by the Individual Respondents pursuant to this ORDER:
{{7-31-92 p.C-2239}}

       (i) shall be made or provided from the Individual Respondents' personal assets; and
       (ii) shall not be paid for or funded in any manner whatsoever from or by the use of the Bank's assets, including without limitation, by means of any extension of credit from said Bank;
   (b) The prohibition against the use of Bank assets to pay for or fund the restitution or reimbursement required shall not include:
       (i) payment by the Bank of compensation to the Individual Respondents as provided in paragraph 1(a) of this ORDER; or
       (ii) payment by the Bank of any dividend as provided in paragraph 8 of this ORDER.

   [.8] 8. The Bank shall not pay or declare any cash dividends without the prior written consent of the Regional Director and the State Director.

   [.9] 9. No more than 60 days from the effective date of this ORDER, the Individual Respondents and the Bank shall eliminate and/or correct all violations of law and regulations committed by the Bank as described on pages 6-1 and 6-2 of the FDIC's Report of Examination of the Bank as of July 19, 1991, except for the lending limit violation described on page 6-1. The lending limit violation described on page 6-1 shall be eliminated or corrected as directed by the Department of Banking and Finance for the State of Nebraska.

   [.10] 10. Effective the date of this ORDER, the Bank shall maintain records which identify the executive officer or employee of the Bank who originates, authorizes or approves each extension of credit made by the Bank. No more than 60 days from the effective date of this ORDER, the Bank shall correct all other deficiencies in the Bank's internal routine and controls described on page 6-a of the FDIC's Report of Examination of the Bank as of July 19, 1991.

   [.11] 11. Following the effective date of this ORDER, the Bank shall send to its shareholders a description of this ORDER, (a) in conjunction with the Bank's next shareholder communication, and also (b) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Registration and Disclosure Section, 550 17th Street, N.W., Washington, D.C. 20429, for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.

   [.12] 12. The Bank shall furnish written progress reports to the Regional Director and the State Director detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof every 90 days, beginning 90 days from the effective date of this ORDER. In addition, the Bank shall furnish such reports on request of either the Regional Director or the State Director. All progress reports and other written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the board meeting.
   This ORDER shall become effective 10 days from the date of its issuance.
   The provisions of this ORDER shall be binding upon the Individual Respondents and the Bank and its institution-affiliated parties, successors and assigns.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Dated this 7th day of May, 1992.
   Pursuant to delegated authority.

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